SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   -----------

                                    FORM 10-Q

              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended June 30, 1998
                           Commission File No. 0-23611

                                DSET Corporation
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

          New Jersey                                     22-3000022
-------------------------------             ------------------------------------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)

1011 US Highway 22, Bridgewater, New Jersey                           08807
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                            (Zip Code)

                                 (908) 526-7500
                         -------------------------------
                         (Registrant's Telephone Number,
                              Including Area Code)

      Indicate by check mark whether the  registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

          Yes:   X                              No:
              --------                             --------

      Indicate  the  number of shares  outstanding  of each of the  Registrant's
classes of common stock, as of July 31, 1998:

          Class                                 Number of Shares
          -----                                 ----------------
 Common Stock, no par value                         9,542,613


<PAGE>


                                DSET CORPORATION

                                TABLE OF CONTENTS
                                -----------------


                                                                         Page
                                                                         ----

PART I.  FINANCIAL INFORMATION.........................................     1

         Item 1.  Financial Statements.................................     1

           Consolidated Balance Sheets as of June 30,1998
             (unaudited) and December 31, 1997.........................     2

           Consolidated Statements of Income for the Three Months
             Ended June 30, 1998 and 1997 (unaudited)..................     3

           Consolidated Statements of Income for the Six Months
             Ended June 30, 1998 and 1997 (unaudited)..................     4

           Consolidated Statements of Cash Flows for the Six Months
             Ended June 30, 1998 and 1997 (unaudited)..................     5

           Notes to Consolidated Financial Statements (unaudited)......     6

         Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations..................    11

           Results of Operations.......................................    12

           Liquidity and Capital Resources.............................    15

PART II. OTHER INFORMATION............................................     17

         Item 2.Changes in Securities and Use of Proceeds.............     17

         Item 5.Other Information.....................................     18

         Item 6.Exhibits and Reports on Form 8-K......................     18

SIGNATURES............................................................     19


                                     - i -


<PAGE>















                          PART I. FINANCIAL INFORMATION

                          Item 1. Financial Statements














                                     - 1 -


<PAGE>


<TABLE>
<CAPTION>
                                         DSET Corporation
                                   Consolidated Balance Sheets

                                                                 June 30, 1998      December 31, 1997
                                                                 -------------      -----------------
                                                                  (unaudited)
                     Assets
 Current assets:
<S>                                                              <C>                <C>         
  Cash and cash equivalents ................................     $  3,040,545       $  2,081,846
  Marketable securities ....................................       39,388,237          1,123,795
  Accounts receivable, net of allowance for
    doubtful accounts of $89,836 and $125,504 ..............        6,998,919          7,564,442
  Deferred income taxes ....................................          158,681            158,681
  Prepaid expenses and other current assets ................           58,285            243,883
                                                                 ------------       ------------
    Total current assets ...................................       49,644,667         11,172,647
Fixed assets, net ..........................................        1,669,782          1,560,948
Goodwill, net ..............................................          148,868            167,873
Other assets ...............................................          390,625            413,760
                                                                 ------------       ------------

    Total assets ...........................................     $ 51,853,942       $ 13,315,228
                                                                 ============       ============

           Liabilities, Cumulative Redeemable Convertible Preferred
                   Stock and Shareholders' Equity (Deficit)
Current liabilities:
  Accounts payable and accrued expenses ....................     $  2,989,437       $  2,779,954
  Note payable .............................................          221,657            220,000
  Income taxes payable .....................................           71,501               --
  Deferred revenues ........................................        2,019,903          1,897,039
                                                                 ------------       ------------
    Total current liabilities ..............................        5,302,498          4,896,993
Deferred income taxes ......................................          103,714            103,714
Note payable ...............................................             --              111,657
                                                                 ------------       ------------

    Total liabilities ......................................        5,406,212          5,112,364
                                                                 ------------       ------------
Commitments
Series A cumulative redeemable convertible
  preferred  stock,  no par value; 750,000
  shares authorized, no shares issued or
  outstanding at June 30, 1998; 676,361 shares
  issued and outstanding at December 31, 1997;
  cumulative accrued and undeclared dividends
  of $1,680,859 at December 31, 1997 .......................             --           11,603,996
                                                                 ------------       ------------
Shareholders' equity (deficit):
Preferred stock, no par value; 5,000,000 shares
  authorized, none issued or outstanding at
  June 30, 1998 or December 31, 1997 .......................             --                 --
Common stock, no par value; authorized
  40,000,000 shares, issued 9,452,050 at June
  30, 1998 and 6,775,092 shares at December 31,
  1997, respectively .......................................       41,053,525          2,537,806
Deferred stock compensation ................................         (711,701)          (875,835)
Retained earnings ..........................................        6,105,906          4,936,894
Treasury stock, no shares and 3,043,625 shares
  of common stock at cost at June 30, 1998 and
  December 31, 1997, respectively ..........................             --           (9,999,997)
                                                                 ------------       ------------
    Total shareholders' equity (deficit) ...................       46,447,730         (3,401,132)
                                                                 ------------       ------------

    Total liabilities, cumulative redeemable
     convertible preferred stock and
     shareholders' equity (deficit) ........................     $ 51,853,942       $ 13,315,228
                                                                 ============       ============

            The accompanying notes are an integral part of these financial statements.
</TABLE>


                                              - 2 -
<PAGE>


<TABLE>
<CAPTION>
                                  DSET Corporation
                         Consolidated Statements of Income
                                    (unaudited)


                                                       Three Months Ended June 30,
                                                       ---------------------------
                                                           1998           1997
                                                        -----------    -----------
Revenues:
<S>                                                     <C>            <C>        
   License revenues ................................    $ 3,579,949    $ 2,523,968
   Service revenues ................................      3,360,240      2,514,230
                                                        -----------    -----------
      Total revenues ...............................      6,940,189      5,038,198
                                                        -----------    -----------

Cost of revenues:
   License revenues ................................        514,077        519,507
   Service revenues ................................        931,883        826,717
                                                        -----------    -----------
      Total cost of revenues .......................      1,445,960      1,346,224
                                                        -----------    -----------
     Gross profit ..................................      5,494,229      3,691,974
                                                        -----------    -----------

Operating expenses:
   Sales and marketing .............................      2,112,884      1,183,568
   Research and product development ................      1,605,378        775,488
   General and administrative ......................        647,052        588,752
                                                        -----------    -----------
      Total operating expenses .....................      4,365,314      2,547,808
                                                        -----------    -----------

     Operating income ..............................      1,128,915      1,144,166
Interest income and other income/expenses, net .....        559,396         22,250
                                                        -----------    -----------
Income before income taxes .........................      1,688,311      1,166,416
Provision for income taxes .........................        636,762        384,918
                                                        -----------    -----------
Net income .........................................      1,051,549        781,498
Less:  accrued preferred stock dividends ...........           --          214,889
                                                        -----------    -----------
Net income applicable to common shares .............    $ 1,051,549    $   566,609
                                                        ===========    ===========

Net income per common share ........................    $      0.11    $      0.16
                                                        ===========    ===========
Weighted average number of common shares
  outstanding ......................................      9,404,100      3,474,990
                                                        ===========    ===========

Net income per common share assuming dilution ......    $      0.09    $      0.10
                                                        ===========    ===========
Weighted average number of common shares and
   common equivalent shares outstanding ............     11,690,395      8,120,957
                                                        ===========    ===========


     The accompanying notes are an integral part of these financial statements.
</TABLE>


                                       - 3 -
<PAGE>


<TABLE>
<CAPTION>
                                   DSET Corporation
                           Consolidated Statements of Income
                                      (unaudited)


                                                            Six Months Ended June 30,
                                                          ---------------------------
                                                              1998           1997
                                                          -----------     -----------
Revenues:
<S>                                                       <C>             <C>        
   License revenues ...................................   $ 6,216,584     $ 4,005,498
   Service revenues ...................................     6,045,717       4,226,772
                                                          -----------     -----------
      Total revenues ..................................    12,262,301       8,232,270
                                                          -----------     -----------

Cost of revenues:
   License revenues ...................................       754,706         589,313
   Service revenues ...................................     1,633,878       1,515,437
                                                          -----------     -----------
      Total cost of revenues ..........................     2,388,584       2,104,750
                                                          -----------     -----------
     Gross profit .....................................     9,873,717       6,127,520
                                                          -----------     -----------

Operating expenses:
   Sales and marketing ................................     4,095,878       1,975,491
   Research and product development ...................     3,100,277       1,484,663
   General and administrative .........................     1,176,752       1,237,551
                                                          -----------     -----------
      Total operating expenses ........................     8,372,907       4,697,705
                                                          -----------     -----------

     Operating income .................................     1,500,810       1,429,815
Interest income and other income/expenses, net ........       625,398          42,455
                                                          -----------     -----------
Income before income taxes ............................     2,126,208       1,472,270
Provision for income taxes ............................       783,457         485,850
                                                          -----------     -----------
Net income ............................................     1,342,751         986,420
Less:  accrued preferred stock dividends ..............          --           429,778
                                                          -----------     -----------
Net income applicable to common shares ................   $ 1,342,751     $   556,642
                                                          ===========     ===========

Net income per common share ...........................   $      0.16     $      0.16
                                                          ===========     ===========
Weighted average number of common shares
  outstanding .........................................     8,357,346       3,471,431
                                                          ===========     ===========

Net income per common share assuming dilution .........   $      0.13     $      0.12
                                                          ===========     ===========
Weighted average number of common shares and
   common equivalent shares outstanding ...............    10,643,675       8,003,598
                                                          ===========     ===========


       The accompanying notes are an integral part of these financial statements
</TABLE>


                                        - 4 -
<PAGE>


<TABLE>
<CAPTION>
                                         DSET Corporation
                               Consolidated Statements of Cash Flows
                                            (unaudited)

                                                                      Six Months Ended June 30,
                                                                      -------------------------
                                                                         1998            1997
                                                                    ------------     ------------

Cash flows from operating activities:
<S>                                                                 <C>              <C>         
     Net income ................................................    $  1,342,751     $    986,420
     Adjustments to reconcile net income to net cash provided
       by operating activities:
         Tax benefit from exercise of stock options ............         329,320           62,170
         Depreciation ..........................................         231,812          199,266
         Amortization ..........................................          19,005           72,714
         Deferred stock compensation ...........................         164,134             --
         Loss from joint venture ...............................          39,655             --
         Changes in assets and liabilities:
           Accounts receivable .................................         565,523       (1,838,486)
           Other assets ........................................          69,269            3,184
           Accounts payable and accrued expenses ...............         209,483          819,167
           Income taxes payable ................................          71,501          161,171
           Deferred revenues ...................................         122,863          664,279
                                                                    ------------     ------------
              Net cash provided by operating activities ........       3,165,316        1,129,885
                                                                    ------------     ------------
Cash flows from investing activities:
     Loan repayment by officers and shareholders ...............         100,000             --
     Purchases of marketable securities ........................     (41,795,442)        (278,792)
     Redemption of marketable securities .......................       3,531,000             --
     Acquisition of fixed assets ...............................        (340,836)        (449,130)
     Note repayments ...........................................        (110,000)            --
     Investment in joint venture ...............................            --           (245,000)
                                                                    ------------     ------------
              Net cash used in investing activities ............     (38,615,278)        (972,922)
                                                                    ------------     ------------
Cash flows from financing activities:
     Proceeds from the issuance of common stock, net ...........      36,050,825             --
     Proceeds from exercise of stock options ...................         357,836          141,495
                                                                    ------------     ------------
              Net cash provided by financing activities ........      36,408,661          141,495
                                                                    ------------     ------------
              Net increase in cash and cash equivalents ........         958,699          298,458
Cash and cash equivalents, beginning of period .................       2,081,846          784,086
                                                                    ------------     ------------
Cash and cash equivalents, end of period .......................    $  3,040,545     $  1,082,544
                                                                    ============     ============
Supplemental disclosure of cash flow information:
     Cash paid during the period for income taxes ..............    $    391,512     $    251,201
     Cash paid during the period for interest ..................           7,604             --
Non-cash activities:
     Accrued dividends on Series A preferred stock .............    $       --       $    429,778
     Conversion of Series A preferred stock to common stock ....      11,603,996             --
     Note issued for purchase of net assets of Marben Products,
       Inc .....................................................            --            441,657


            The accompanying notes are an integral part of these financial statements.
</TABLE>


                                              - 5 -
<PAGE>


                                DSET CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note 1 -- Basis of Presentation:
--------------------------------

      The  information  presented  as of June  30,  1998 and  1997,  and for the
three-month and six-month periods then ended, is unaudited,  but, in the opinion
of DSET Corporation's  (the "Company")  management,  the accompanying  unaudited
financial  statements  contain  all  adjustments   (consisting  only  of  normal
recurring  adjustments)  which  the  Company  considers  necessary  for the fair
presentation  of the  Company's  financial  position as of June 30, 1998 and the
results of its operations and its cash flows for the  three-month  and six-month
periods ended June 30, 1998 and 1997. The financial  statements  included herein
have been prepared in accordance with generally accepted  accounting  principles
and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted.  These  financial  statements  should be read in
conjunction with the Company's audited  financial  statements for the year ended
December 31, 1997,  which were  included as part of the  Company's  Registration
Statement on Form S-1 (Registration No. 333-43827), as declared effective by the
Securities and Exchange Commission (the "Commission") on March 12, 1998.

      Results for the interim period are not  necessarily  indicative of results
that may be expected for the entire year.


Note 2 -- Summary of Significant Accounting Policies:
-----------------------------------------------------

      CASH AND CASH EQUIVALENTS

      The Company  considers  all highly  liquid  investments  purchased  with a
maturity of three months or less to be cash equivalents.

      MARKETABLE SECURITIES

      The marketable securities portfolio held by the Company consists primarily
of money market funds which are considered to be  available-for-sale  securities
and are  reported at fair value.  Unrealized  holding  gains and losses were not
significant at June 30, 1998 and 1997.

      CAPITALIZED SOFTWARE DEVELOPMENT COSTS

      Capitalization   of  costs  begins  on   establishment   of  technological
feasibility.  Costs incurred prior to establishment of technological feasibility
are charged to research and product development  expense. The ongoing assessment
of  recoverability  of  capitalized  costs  requires  considerable  judgment  by
management  with respect to certain  factors  including the  anticipated


                                     - 6 -
<PAGE>


future gross revenue,  estimated economic life and changes in technology.  These
factors are considered on a product-by-product basis.

      Amortization  of  capitalized   software  costs  is  calculated   using  a
straight-line  method over the estimated  useful life of the respective  product
(five years).  Amortization  expense  related to capitalized  software costs was
approximately  $-0- and $73,000 for the six months ended June 30, 1998 and 1997,
respectively. Amortization expense for the three months ending June 30, 1998 and
1997 was $-0- and $36,000, respectively.

      REVENUE RECOGNITION

      License  revenues are recorded when the software has been delivered to the
Company's  licensees  and  all  significant  obligations  have  been  satisfied.
Revenues from run-time  licenses are recognized as equipment using the Company's
software is deployed by the Company's customers. Service revenues are recognized
over the period in which the service is  performed  based on the  percentage  of
direct  labor  costs  incurred  to the  total  costs  estimated.  Revenues  from
maintenance  contracts  are  deferred  and  recognized  over  the  term  of  the
respective contracts (typically twelve months).

      INCOME TAXES

      The  Company  utilizes  an  asset  and  liability  approach  to  financial
reporting  for income  taxes.  Deferred  income tax assets and  liabilities  are
computed annually for differences  between the financial statement and tax basis
of assets and liabilities  that will result in taxable or deductible  amounts in
the  future,  based on enacted  tax laws and rates  applicable  to the period in
which  the  differences  are  expected  to  affect  taxable  income.   Valuation
allowances are established, when necessary, to reduce the deferred tax assets to
the amount expected to be realized.

      FAIR VALUE OF FINANCIAL INSTRUMENTS

      The  carrying  amounts  in the  financial  statements  for  cash  and cash
equivalents,  marketable securities,  accounts receivable,  and accounts payable
and  accrued  expenses  approximate  their  market  value  because  of the short
maturity of those instruments.

      RECENTLY ISSUED ACCOUNTING STANDARDS

      In June 1997, the Financial  Accounting  Standards Board issued  Statement
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 applies
to all companies and is effective for fiscal years  beginning after December 15,
1997.  SFAS No. 130  establishes  standards  for the  reporting  and  display of
comprehensive income in a set of financial  statements.  Comprehensive income is
defined as the change in net  assets of a  business  enterprise  during a period
from transactions  generated from non-owner sources.  It includes all changes in
equity during a period except those  resulting  from  investments  by owners and
distributions to owners.  Management  believes that the adoption of SFAS No. 130
has not had a material impact on the financial statements.


                                     - 7 -
<PAGE>


      In June 1997, the Financial  Accounting  Standards Board issued  Statement
No. 131  "Disclosures  about Segments of an Enterprise and Related  Information"
("SFAS No. 131").  SFAS No. 131 applies to all public companies and is effective
for fiscal years  beginning  after December 15, 1997. SFAS No. 131 requires that
business segment financial  information be reported in the financial  statements
utilizing the management  approach.  The  management  approach is defined as the
manner in which  management  organizes the segments  within the  enterprise  for
making operating decisions and assessing  performance.  The Company has only one
operating   segment  -  providing   software   products   and  services  to  the
telecommunications  industry.  Management  believes the adoption of SFAS No. 131
has not had a material impact on the financial statements.

      On  June  15,  1998,  the  Financial  Accounting  Standards  Board  issued
Statement of Financial  Accounting Standards No. 133 "Accounting for Derivatives
and Hedging  Activities"  ("SFAS No.  133").  SFAS No. 133 is effective  for all
fiscal  quarters of all fiscal years  beginning  after June 15, 1999 (January 1,
2000 for the Company).  SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value.  Changes in the fair value of
derivatives are recorded each period in current earnings or other  comprehensive
income,  depending  on whether a  derivative  is  designated  as part of a hedge
transaction  and,  if it is, the type of hedge  transaction.  Management  of the
Company anticipates that, due to its limited use of derivative instruments,  the
adoption  of SFAS No. 133 will not have a  significant  effect on the  Company's
results of operations or its financial position.

       In October 1997, the American  Institute of Certified Public  Accountants
issued  Statement of Position 97-2,  "Software  Revenue  Recognition,"  which is
effective for transactions entered into in fiscal years beginning after December
15,  1997.  The  Statement  of Position  governs the  recognition  of revenue by
enterprises that license, sell, lease or otherwise market software, except where
software is  incidental  to the products or services  being  offered as a whole.
Application of this  Statement of Position has not had a material  impact on the
financial statements.


Note 3 -- Initial Public Offering:
----------------------------------

      On March 18, 1998, the Company  consummated an initial public  offering of
3,500,000  shares of its  Common  Stock at a price to the  public of $16.00  per
share,  of which  2,500,000  shares  were  issued  and sold by the  Company  and
1,000,000 shares were sold by certain  shareholders of the Company (the "Selling
Shareholders").  The  net  proceeds  to  the  Company  from  the  offering  were
approximately $36.1 million. On April 7, 1998, certain Selling Shareholders sold
an additional  525,000  shares of the  Company's  Common Stock at a price to the
public  of  $16.00  per  share  upon the  consummation  of the  exercise  of the
Underwriters'  over-allotment  option.  The  Company  did not receive any of the
proceeds from the sale of shares by the Selling Shareholders.

      The net proceeds  received by the Company upon the  consummation of such
offering,   pending   specific   application,   are  invested  in  short-term,
investment-grade,  interest-bearing


                                     - 8 -
<PAGE>


instruments.  See "Item 2.  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."


Note 4 -- Cumulative Redeemable Convertible Preferred Stock:
------------------------------------------------------------

      In  December  1995,  the  Company  issued  676,361  shares of  cumulative,
convertible Series A Preferred Stock. Upon consummation of the Company's initial
public  offering,  the  shares of Series A  Preferred  Stock  converted  into an
aggregate of 3,043,625 shares of the Company's Common Stock.


Note 5 -- Earnings Per Share
----------------------------

      In February  1997,  the FASB issued  SFAS No.  128,  "Earnings  Per Share"
(EPS), which specifies the computation, presentation and disclosure requirements
for earnings per share of entities with publicly held company stock or potential
common stock. The statement defines two earnings per share  calculations,  basic
and  diluted.  The  objective of basic EPS is to measure the  performance  of an
entity over the reporting period by dividing income available to common stock by
the  weighted  average  shares  outstanding.  The  objective  of diluted  EPS is
consistent  with that of basic EPS,  that is to measure  the  performance  of an
entity over the reporting period,  while giving effect to all dilutive potential
common  shares that were  outstanding  during the  period.  The  calculation  of
diluted EPS is similar to basic EPS except both the  numerator  and  denominator
are increased for the conversion of potential common shares. The following table
is a reconciliation of the numerator and denominator under each method:


<TABLE>
<CAPTION>

                                                For the three months ended June 30, 1998
                                                -----------------------------------------
                                                                                Per Share
                                                 Income             Shares       Amount
                                              -----------       -----------     ---------
BASIC EPS:
<S>                                           <C>                 <C>            <C>     
Net income applicable to common shares ...    $ 1,051,549         9,404,100      $   0.11

ASSUMING DILUTION:
Net income applicable to common shares
     Warrants ............................           --             160,859
     Stock options .......................           --           2,125,436
                                              -----------       -----------
                                              $ 1,051,549        11,690,395      $   0.09
                                              ===========       ===========

                                                 For the six months ended June 30, 1998
                                              -------------------------------------------
                                                                                Per Share
                                                 Income             Shares       Amount
                                              -----------       -----------     ---------

BASIC EPS:
Net income applicable to common shares ...    $ 1,342,751         8,357,346      $   0.16

ASSUMING DILUTION:
Net income applicable to common shares
     Warrants ............................           --             158,909
     Stock options .......................           --           2,127,420
                                              -----------        ----------
                                              $ 1,342,751        10,643,675      $   0.13
                                              ===========        ==========
</TABLE>


                                     - 9 -
<PAGE>


Note 6 - New Subsidiary
-----------------------

      On  May  7,  1998  the  Company's   Board  of  Directors   authorized  the
establishment of a wholly-owned  subsidiary in Chengdu,  China.  Initially,  the
purpose of this  subsidiary  is for  research and  development.  The name of the
subsidiary is Chengdu DSET Science and Technology Co., Ltd.


                                     - 10 -
<PAGE>


Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.


General
-------

      DSET designs, develops,  markets and supports standards-based  application
development  tools,  custom  application  development  services,   Local  Number
Portability Solutions and OSS Gateway products for the global telecommunications
industry.  From its  founding in 1989,  the  Company has focused on  distributed
concurrent  object  technology  and the creation of  applications  that could be
distributed among many processors. Additionally, the Company developed extensive
knowledge of requirements for multiple protocols and multi-vendor communications
as well as real time operating systems.  In the early 1990's, the Company made a
strategic  decision to focus on  creating  suites of tools that  facilitate  the
development of solutions based upon the  Telecommunications  Management  Network
("TMN") standard.  Substantially all of the Company's revenues to date have been
derived from application  development tools and services based on TMN standards.
The Company's success will depend on continued growth in the market for advanced
telecommunications products and services.

      The Company had no customers  which accounted for more than 10% of revenue
for the  quarter  ended  June  30,  1998  and two  significant  customers  which
accounted for 32.4% of total  revenues for the three months ended June 30, 1997.
For the six months  ended June 30,  1998 and 1997,  the  Company had one and two
significant   customers  which  accounted  for  15.9%  and  26.6%  of  revenues,
respectively.  The Company  anticipates  that its results of  operations  in any
given  period will  continue to depend to a  significant  extent upon sales to a
small  number of  customers.  As a result of this  customer  concentration,  the
Company's revenues from quarter to quarter and business, financial condition and
results  of   operations   may  be  subject  to   substantial   period-to-period
fluctuations.

      The  Company   derives  a   significant   portion  of  its  revenues  from
international  sales  which  constituted  approximately  21.2%  and 36.2% of the
Company's  total  revenues  in the  quarters  ended  June  30,  1998  and  1997,
respectively.  For the six months  ended June 30, 1998 and 1997,  foreign  sales
accounted  for  25.7%  and  29.5%  of  revenues,   respectively.  The  Company's
international sales currently are United States dollar-denominated. As a result,
an  increase  in the value of the  United  States  dollar  relative  to  foreign
currencies  could make the Company's  products and services less  competitive in
international markets.

      Statements  contained  in this Form 10-Q that are not based on  historical
fact are  "forward-looking  statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended.  Forward-looking  statements may be
identified  by the use of  forward-looking  terminology  such as "may,"  "will,"
"expect," "estimate,"  "anticipate," "continue," or similar terms, variations of
such terms or the  negative  of those  terms.  Such  forward-looking  statements
involve  risks  and  uncertainties,  including,  but  not  limited  to:  (i) the
Company's dependence on the rapidly evolving  telecommunications  industry, (ii)
the Company's dependence on the TMN industry standard, (iii) rapid technological
change in the Company's  industry and (iv) risks 


                                     - 11 -
<PAGE>


associated  with  the  development  and  marketing  of new  products,  including
carrier-to-carrier  applications.  The success of the Company depends to a large
degree upon increased  utilization of its application  development tools, custom
application   development  services  and   carrier-to-carrier   applications  by
telecommunications  carriers and network equipment vendors.  As a result of such
risks and others  expressed from time to time in the Company's  filings with the
Commission,  the Company's actual results may differ materially from the results
discussed in or implied by the forward-looking statements contained herein.


Results of Operations
---------------------


THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997

      Revenues.  Total  revenues  increased  37.7% to $6.9 million in the second
quarter  of 1998  from $5.0  million  in the  second  quarter  of 1997.  License
revenues increased 41.8% to $3.6 million in the second quarter of 1998 from $2.5
million in the second quarter of 1997. This increase was primarily  attributable
to an increased  demand for the Company's  TMN-based agent tools and recognition
of run-time  royalties.  Service revenues increased 33.6% to $3.4 million in the
second  quarter of 1998 from $2.5  million in the second  quarter of 1997.  This
increase was primarily attributable to professional services projects, fees from
consulting services and training courses,  and new customers (equipment vendors)
purchasing  the Company's new solutions  (with project work for  implementation)
for facilitating  access to the central office switch from xDLS-based  services.
In the quarters ended June 30, 1998 and 1997, the Company derived  approximately
51.6% and 50.1%,  respectively,  of its total revenues from license revenues and
approximately 48.4% and 49.9%, respectively,  of its total revenues from service
revenues.

      Gross profit.  The Company's gross profit  increased 48.8% to $5.5 million
in the second  quarter of 1998 from $3.7 million in the second  quarter of 1997.
Gross  profit  percentage  increased  to 79.2% of total  revenues  in the second
quarter  of 1998  from  73.3%  in the  second  quarter  of  1997.  Gross  profit
percentage  for license  revenues  increased to 85.6% for the second  quarter of
1998 from 79.4% for the comparable  1997 period due to less third party software
as a component of sales.  Gross profit  percentage for service revenue increased
to 72.3% in the second quarter of 1998 from 67.1% in the second quarter of 1997.
This increase was  attributable  to higher margins  associated  with  consulting
services,  training revenues,  new customers  (equipment vendors) purchasing the
Company's  new solutions for  facilitating  access to the central  office switch
from xDLS-based services and higher utilization of personnel resources.

      Sales and marketing expenses. Sales and marketing expenses increased 78.5%
to $2.1  million in the second  quarter of 1998 from $1.2  million in the second
quarter of 1997,  and increased to 30.4% of total revenues in the second quarter
of 1998 from 23.5% of total revenue in the second quarter of 1997. This increase
as a percentage of sales is primarily  attributable  to increased  personnel and
related costs  resulting  from the increase in the Company's  sales force and an
expanded marketing department.

      Research   and  product   development   expenses.   Research  and  product
development  expenses  increased 107.0% to $1.6 million in the second quarter of
1998 from  $775,000 in the 


                                     - 12 -
<PAGE>


second quarter of 1997, and increased to 23.1% from 15.4% of total revenues over
the  respective  periods.  This  increase  in research  and product  development
expenses  both in absolute  dollars  and as a  percentage  of  revenues  was due
primarily  to  additional  personnel  expenses  attributable  to an  increase in
staffing and an expansion in the number of projects under development.

      General and administrative  expenses.  General and administrative expenses
increased  9.9% to $647,000 in the second  quarter of 1998 from  $589,000 in the
second  quarter of 1997,  and decreased to 9.3% from 11.7% of total revenues for
the respective periods.  The increase of general and administrative  expenses in
the second  quarter of 1998 as compared to the  corresponding  period in 1997 is
due to additional  staffing in this area and costs  associated  with  compliance
with statutory public company filing requirements.

       Interest income and other  income/expenses,  net. Net interest income and
other  income/expenses  increased  to  $559,000  for the second  quarter of 1998
compared to $22,000 for the second quarter of 1997.  This increase was primarily
due to higher  balances in cash and  short-term  investments  as a result of the
Company's initial public offering of its Common Stock in March 1998.

      Income  taxes.  The  Company's  effective tax rate was 37.7% and 33.0% for
each of the quarters ended June 30, 1998 and 1997, respectively.  Such effective
tax rates were lower than the  statutory tax rates due primarily to research and
development  tax  credits.  The  increase  in 1998 is due to the  non-deductible
nature of deferred  stock  compensation  associated  with the  issuance of stock
options.  As of June 30, 1998, the research and  development  tax credit has not
been renewed by Congress. If this provision in the tax code is not retroactively
renewed,  the loss of this credit will result in a higher effective tax rate for
the Company in future periods.


SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

      Revenues.  Total  revenues  increased  48.9% to $12.2  million for the six
months  ending June 30, 1998 from $8.2  million in the first six months of 1997.
License revenues  increased 55.2% to $6.2 million for the six months ending June
30, 1998 from $4.0  million in the first six months of 1997.  This  increase was
primarily  attributable to an increased demand for the Company's TMN-based agent
tools.  Service  revenues  increased  43.0% to $6.0  million  for the six months
ending  June 30,  1998 from $4.2  million  in the first six  months  1997.  This
increase was primarily  attributable  to professional  services  projects and an
increase in fees from  consulting  services  and  training  courses.  In the six
months ended June 30, 1998 and 1997, the Company derived approximately 50.7% and
48.7%,   respectively,   of  its  total  revenues  from  license   revenues  and
approximately 49.3% and 51.3%, respectively,  of its total revenues from service
revenues.

      Gross profit.  The Company's gross profit  increased 61.1% to $9.9 million
for the six  months  ending  June 30,  1998 from $6.1  million  in the first six
months of 1997. Gross profit percentage increased to 80.5% of total revenues for
the six months  ending June 30, 1998 from 74.4% in the first six months of 1997.
Gross profit  percentage for license  revenues  increased to 87.9% for the first
six months of 1998 from 85.3% for the comparable 1997 period.  This


                                     - 13 -
<PAGE>


increase was  attributable  to the slightly  better margins on the sale of tools
due to  less  third  party  software  as a  component  of  sales.  Gross  profit
percentage for service revenue  increased to 73.0% for the six months ended June
30,  1998  from  64.1% in the  first  six  months  of 1997.  This  increase  was
attributable  to higher  margins and  utilization of personnel  associated  with
consulting services, training revenues and maintenance.

      Sales and  marketing  expenses.  Sales and  marketing  expenses  increased
107.3% to $4.1 million for the six months ending June 30, 1998 from $2.0 million
in the first six months of 1997,  and  increased to 33.4% of total  revenues for
the six months ending June 30, 1998 from 24.0% of total revenue in the first six
months of 1997. This increase was primarily  attributable to increased personnel
and related costs  resulting from the increase in the Company's  sales force and
an expanded marketing department.

      Research   and  product   development   expenses.   Research  and  product
development  expenses increased 108.8% to $3.1 million for the six months ending
June 30, 1998 from $1.5 million in the first six months of 1997,  and  increased
to 25.3% from 18.0% of total revenues over the respective periods. This increase
in research and product  development  expenses both in absolute dollars and as a
percentage  of revenues  was due  primarily  to  additional  personnel  expenses
attributable  to an  increase  in  staffing  and an  expansion  in the number of
projects under development.

      General and administrative  expenses.  General and administrative expenses
decreased 5% to $1.1  million for the six months  ending June 30, 1998 from $1.2
million in the first six  months of 1997,  and  decreased  to 9.6% from 15.0% of
total  revenues  for the  respective  periods.  The  reduction  of  general  and
administrative  expenses for the six months  ending June 30, 1998 as compared to
the corresponding period in 1997 was due to the non-recurring cost of hiring two
executives in 1997. Further reduction of these expenses is due to the transition
of the Chief  Technical  Officer  from  administrative  functions  to  technical
functions.

       Interest income and other  income/expenses,  net. Net interest income and
other  income/expenses  increased  to $625,000  for the first six months of 1998
compared  to  $42,000  for the  first  six  months of 1997.  This  increase  was
primarily due to higher balances in cash and short-term  investments as a result
of the Company's initial public offering of its Common Stock in March 1998.

      Income  taxes.  The  Company's  effective tax rate was 36.8% and 33.0% for
each of the six  months  ended  June  30,  1998  and  1997,  respectively.  Such
effective  tax rates were lower than the  statutory  tax rates due  primarily to
research  and  development  tax  credits.  The rate is higher in 1998 due to the
non-deductibility of deferred stock compensation associated with the issuance of
stock options.  As of June 30, 1998, the research and development tax credit has
not  been  renewed  by  Congress.  If  this  provision  in the  tax  code is not
retroactively renewed, the loss of this credit will result in a higher effective
tax rate for the Company in future periods.


                                     - 14 -
<PAGE>


Liquidity and Capital Resources
-------------------------------

      Since its  inception  in 1989,  the Company has  financed  its  operations
primarily through cash generated by operations.  At June 30, 1998, the Company's
cash, cash equivalents and marketable securities aggregated  approximately $42.4
million,  of which  cash  and cash  equivalents  aggregated  approximately  $3.0
million. The Company's working capital was $44.0 million at June 30, 1998.

      Accounts  receivable  decreased to $7.0 million at June 30, 1998 from $7.6
million at  December  31, 1997  primarily  as a result of  increased  collection
efforts on aged accounts.

      The Company bills its  customers,  several of which are based in Korea and
Japan, in U.S.  dollars at agreed-upon  contractual  terms.  The Company has not
experienced any significant negative effects on its liquidity as a result of the
volatility and devaluation trends that recently have been experienced in certain
Asian  markets,  although  no  assurance  can be made that the Company  will not
experience  difficulty collecting accounts receivable from such customers in the
future.  Accounts  receivable at June 30, 1998 includes  approximately  $901,000
from customers in this region.

      The  Company's  capital  expenditures  were  approximately   $341,000  and
$560,000 for the six months ended June 30, 1998 and 1997, respectively. Although
the  Company  anticipates  higher  levels of  equipment  and  facilities-related
expenditures  in the  foreseeable  future,  such  future  expenditures  are  not
anticipated  to be  significantly  higher as a percentage  of total  revenues as
compared to prior periods.

      In August  1997,  the  Company  obtained  an  unsecured  revolving  credit
facility with a bank pursuant to which the Company may borrow up to a maximum of
$3.0 million.  Borrowings  under this line of credit bear interest at the bank's
prime rate less 0.25% on amounts  outstanding  of less than $1.0  million and at
the bank's prime rate for aggregate principal amounts exceeding $1.0 million. No
borrowings  under this line were  outstanding  as of June 30, 1998.  This credit
facility  contains,  among  other  provisions,  covenants  which (i) mandate the
amount of working  capital the Company must maintain at the end of each calendar
quarter and (ii) restrict the Company's ability to pay cash dividends.

      On March 18, 1998, the Company  consummated an initial public  offering of
3,500,000  shares of its  Common  Stock at a price to the  public of $16.00  per
share,  of which  2,500,000  shares  were  issued  and sold by the  Company  and
1,000,000 shares were sold by certain Selling Shareholders.  The net proceeds to
the Company from the offering  were  approximately  $36.1  million.  On April 7,
1998,  certain  Selling  Shareholders  sold an additional  525,000 shares of the
Company's  Common  Stock at a price to the  public of $16.00  per share upon the
consummation of the exercise of the  Underwriters'  over-allotment  option.  The
Company  did not  receive  any of the  proceeds  from the sale of  shares by the
Selling Shareholders.

      The net  proceeds  received by the Company upon the  consummation  of such
offering,   pending   specific   application,   were  invested  in   short-term,
investment-grade, interest-bearing instruments.


                                     - 15 -
<PAGE>


      The Company believes that its existing available cash, credit facility and
the cash flow  expected  to be  generated  from  operations,  together  with the
proceeds  from its  initial  public  offering,  will be  adequate to satisfy its
current and planned operations for at least the next 12 months.  There can be no
assurance, however, that the Company will not require additional financing prior
to such time to fund its operations or possible acquisitions.


Year 2000 Compliance
--------------------

      The  Company  believes  that it has  sufficiently  assessed  its  state of
readiness  with  respect  to its Year 2000  compliance.  The  Company  generally
warrants and has  represented  to its customers  that its products are free from
Year 2000 defects.  In 1997, the Company conducted a Year 2000 compliance review
of its products and  determined  that one component of its tool suites  (version
ASN.C sold prior to May 1997) was unable to interpret four digits, including the
year 2000 and beyond.  The Company  notified all of its customers of the problem
and in June 1997 made the correction  available on its website,  free of charge.
In  addition,  the  Company  provided  annual  maintenance  customers  with  the
correction as part of a subsequent upgrade of the product.  Failure of customers
to properly  implement the correction,  or problems with the  correction,  could
cause  errors  in  customers'   products   which  may   materially   impact  the
functionality  of those  products.  The cost associated with such correction was
not considered  material and the Company anticipates limited future expenditures
to address  Year 2000  issues.  There can be no  assurances,  however,  that the
Company's  products will not be used by other  companies,  or its customers,  to
build applications which might not be Year 2000 compliant, or that the Company's
products  or  applications  built  with  the  Company's  products  will  not  be
integrated  by the  Company or its  customers  or  interact  with  non-compliant
software  or other  products  which may  expose the  Company to claims  from its
customers.

      The Company's internal computer systems and recently purchased  Management
Information  System are Year 2000  compliant,  and the Company  does not believe
that  there  will be  future  significant  costs  related  to  maintaining  such
compliance.


                                     - 16 -
<PAGE>


                           PART II. OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds


Changes in Securities
---------------------

      The following information relates to all securities of the Company sold by
the  Company  within  the past  quarter  which  were not  registered  under  the
securities laws at the time of grant, issuance and/or sale:

      1.    The Company has,  during the second  quarter of 1998,  granted stock
            options pursuant to its 1998 Stock Plan which, at the time of grant,
            had not yet been registered under the securities laws. The following
            table sets forth certain  information  regarding  such grants during
            the quarter:

                           Number             Exercise
                         of shares              Price
                         ---------            --------

                          16,750              $ 15.25

                          25,000              $ 15.375

      The Company did not employ an underwriter in connection  with the issuance
of the securities described above. The Company believes that the issuance of the
foregoing  securities was exempt from registration under either (i) Section 4(2)
of the  Securities  Act of 1933,  as amended (the "Act"),  as  transactions  not
involving  any public  offering  and such  securities  having been  acquired for
investment and not with a view to  distribution,  or (ii) Rule 701 under the Act
as transactions made pursuant to a written compensatory benefit plan or pursuant
to a written  contract  relating to  compensation.  All  recipients had adequate
access to information about the Company.


Use of Proceeds
---------------

      On March  12,  1998,  the  Commission  declared  effective  the  Company's
Registration Statement  (Registration Statement No. 333-43827) as filed with the
Commission in connection  with the Company's  initial public  offering of Common
Stock, which was managed by BT Alex. Brown Incorporated,  BancAmerica  Robertson
Stephens and  SoundView  Financial  Group,  Inc.  Pursuant to such  Registration
Statement,  the Company  registered and sold an aggregate of 2,500,000 shares of
its Common Stock,  for a gross  aggregate  offering price of $40.0 million.  The
Company incurred  underwriting  discounts and commissions of approximately  $2.8
million.  In connection with such offering,  the Company incurred total expenses
of approximately $1.1 million.  As of June 30, 1998, all of the $36.1 million in
net proceeds received by the Company upon consummation of such offering, pending
specific   application,   were   invested   in   short-term,   investment-grade,
interest-bearing instruments.


                                     - 17 -
<PAGE>


      For  working  capital  restrictions  and  limitations  on the payment of
dividends,  see "Item 2.  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."


Item 5.  Other Information.


Initial Public Offering
-----------------------

      On March 18, 1998, the Company  consummated an initial public  offering of
3,500,000  shares of its  Common  Stock at a price to the  public of $16.00  per
share,  of which  2,500,000  shares  were  issued  and sold by the  Company  and
1,000,000 shares were sold by certain Selling Shareholders.  The net proceeds to
the Company  from the offering  were $36.1  million.  On April 7, 1998,  certain
Selling  Shareholders sold an additional  525,000 shares of the Company's Common
Stock at a price to the public of $16.00 per share upon the  consummation of the
exercise of the Underwriters' over-allotment option. The Company did not receive
any of the proceeds from the sale of shares by the Selling Shareholders.

      The net  proceeds  received by the Company upon the  consummation  of such
offering,   pending   specific   application,   were  invested  in   short-term,
investment-grade, interest-bearing instruments.


Item 6.  Exhibits and Reports on Form 8-K.

         (a)   Exhibits.

               27    Financial Data Schedule

         (b)   Reports on Form 8-K.

               No reports on Form 8-K were filed  during the quarter for which
               this report on Form 10-Q is filed.


                                     - 18 -
<PAGE>


                                   SIGNATURES


      Pursuant to the  requirements of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                       DSET Corporation




DATE:   August 13, 1998                By: /s/ William P. McHale, Jr.
                                           -------------------------------
                                           William P. McHale, Jr.
                                           President and Chief Executive
                                           Officer (Principal Executive Officer)



DATE:   August 13, 1998                By: /s/ Paul A. Lipari
                                           -------------------------------
                                           Paul A. Lipari
                                           Chief Financial Officer
                                           (Principal Financial and Accounting
                                           Officer)